Consider the following independent situations. In each case, assume the client is a reporting entity and that a general purpose financial report has been prepared and audited for the financial year ended 30 June 2016. For each scenario provide the type of audit opinion that should be issued and the reason(s) for your decision.

(a)   The auditor believes that the provision for warranty claims has been under-provided by $125,000. The management disagrees and will not adjust the balance. (I) What opinion should be given if audit materiality has been set at $100,000? (ii) How would your answer be different if materiality was set at $200,000?

(b) The client's annual report includes a statement by the directors about the growth in the company's asset values. The figures they used for their calculations are different from those shown in the audited financial statements. The directors will not adjust their figures because they say the differences are less than 10%, so should be regarded as immaterial.

(c)  A legal claim against the client has been in progress for a number of years but the client believed they would win the case so did not provide for any potential liability in its accounts. The court decision was handed down 3 weeks after the end of the financial year. The client was held liable and required to pay a significant sum in compensation. This outcome was disclosed in the notes to the accounts at 30^th June and will be recorded by the client as an expense when paid.

(d) Although there is some question about the entity's ongoing financial viability, the financial reports have been prepared on a "going concern" basis. Action has been taken by management to mitigate the risk of failure and this is likely to be successful. All of this has been disclosed in the notes to the accounts.

(e)  Although there is some question about the entity's ongoing financial viability, the financial reports have been prepared on a "going concern" basis. Action has been taken by management to mitigate the risk of failure and this has been disclosed in the notes to the accounts. The auditor believes that the action will not be sufficient to save the entity from collapse in the short term.

(f)  The client's directors have declined to include the segment reporting disclosures required by AASB 8 on the grounds that it is information that they do not want their competitors to know about.

(g)  The outcome of a significant legal case against the client is unknown at year-end. A large contingent liability has been appropriately disclosed in the notes to the accounts.

(h) In July 2016 a debtor with a small balance at 30^th June was declared insolvent and the amount is now considered to uncollectable. The client decided not to adjust the 30^th June financial statements or notes for this event.

Answer rating: 100% (QA)

The provision for warranty is understated which means income is overstated and liabilities are under... View the full answer